Today’s Blog – Tuesday 18th April 2017

Can a leak in one old onshore oil well affect global oil markets? The answer is probably not – but the possibility exists. The background to this question is a recent oil and gas leak from an old 1970s well located in Alaska’s Prudhoe Bay. The well has been successfully killed and the extent of the leak seems minor.

However, the cause of the leak is unclear – the well apparently “jacked up” by 3-4 feet – how does that happen? Prudhoe Bay currently produces – and reinjects – about 8 Bcf of gas a day – i.e. 3 to 4 times the entire East Coast of Australia’s production, which serves 6 liquefaction trains and a domestic market. That’s a lot of gas circulating in a system which includes obviously old wells and a challenging climatic environment.

If further investigations and remediation work is required, then Prudhoe Bay production – and even wider North Slope production – could be curtailed for a period. That’s nearly quarter of a million barrels per day – and most importantly, those are US barrels.

Production might vary by this order of magnitude from day to day in the likes of Libya and Nigeria – but when it is US barrels, the market takes much more notice – because the data is trusted, immediate and wired into traders’ thought patterns.

Commodity markets

Overnight trading in crude obviously took no account of the thesis outlined above, as prices fell by around 1% to US$55.36 in London and US$52.65 in New York. The key data point from late last week – the BHI rig count – was negative, with an increase of 11 oil rigs (and a fall of 3 gas rigs).

The weekly inventory data issued earlier last week was in fact positive – with a fall in crude of 2.2 mmbbls (plus an SPR draw of 0.6 mmbbls), a fall in gasoline stocks of 3 mmbbls and another drop in distillate stocks of 2.2 mmbbls. However, the market didn’t seem to react much to these numbers before the Easter break and then on Monday the more recent rig count (and fears of rising US production) took hold. As we noted above, US data drives oil markets more than that foreign stuff. Geopolitical tensions in Korea didn’t seem to affect traders much – but that could change, and dramatically, if things escalate from here.

Henry Hub fell ~2% overnight to US$3.16.

LNG and international gas

We are now very much in a seasonal low demand “shoulder” period for LNG in North Asia and that is reflected in Asian spot prices that begin with a US$5 (obviously quite a bit less than current Australian domestic gas prices on offer).

Total has just signed a deal with Japan’s JERA group to sell 6 spot cargoes of LNG – some based on oil price linkages and some on spot market indices.

A JERA Mark II is also emerging from Japan with Tokyo Gas and Kyushu Electric forming their own buying joint venture.

Somewhat to Japan’s West, Gazprom has recently reported that 650 km of the Power of Siberia pipeline to China has been “constructed”. The originally promised 2018 commencement date still seems pretty unlikely.

Governments

This week these is scheduled a follow-up meeting between Australia’s Prime Minister and the leaders of the Queensland LNG exporting companies. The latter are expected to provide an update on progress to supply domestic customers. Origin and Shell have both issued press releases in recent weeks about the new supply contracts – particularly to the politically sensitive South Australian electricity sector.

Santos has yet to say anything and is the key political focus point. The Australian Financial Review has today reported that the Government is being lobbied to somehow take part in facilitating the Santos led GLNG venture swapping spot LNG cargoes for more domestic gas supplies. That should not be that complicated – until one remembers GLNG comprises a weakened and small operator in the form of Santos, two Asian “NOCs” (Petronas and Kogas) and one Super-Major (Total). Good luck in herding those cats. And what Governments can actually do in terms of helping undertake swaps is somewhat opaque to this reader.

Quote of the day

Last year we reported on what we roughly calculated to be a US$1 trillion sum in forgone investment in oil and gas exploration and development caused by the oil price slump. Amin Nasser, chief executive of Saudi Aramco, has joined us, saying on Friday that 20m barrels a day in future production capacity was required to meet demand growth and offset natural field declines in the coming years.

“That is a lot of production capacity, and the investments we now see coming back — which are mostly smaller and shorter term — are not going to be enough to get us there.”